With Amazon soon making a location decision as to where it should open a second headquarters in the US, foreign companies may ask themselves if they need two headquarters, or at least a Regional HQ on either Coast?

Usually, a foreign company entering the US market makes a location decision to erect a HQ on either the East Coast or the West Coast. Often the location is chosen because of proximity. EU companies often choose for the East Coast, Asian companies opt for the West.

3 categories of factors that influence location decision

A study ^[1] regarding the location choice of Foreign Direct Investments identifies 15 factors that play a role in a company’s location selection. These 15 factors can be classified in three different categories:

1. Factors related to the destination location. For instance: a MedTech company will prefer to set up an office in a MedTech cluster. Doing so will give the company easy access to talent, and services needed to support a MedTech company.

2. Factors associated with the foreign company making the investment. The foreign company’s location choice may depend on whether it wants to open a manufacturing plant or a sales office to enter the market.

3. Factors related to the combination of the destination location and the firm making the decision. Geographic distance is the most obvious of such a factor. For a US company interested in setting up shop in Europe, cultural distance may be another factor. Would the US company prefer an office in the London or Warsaw? If the owner has a Polish heritage, the answer may be Poland.

The 15 factors that play a role in the location decision:

Factors related to the destination location:

1. Customer Demand: FDI tends to favor locations with customer demand for the services or products the investing company offers/produces.
2. Tax Rate: A location with a lower tax rate is more favorably looked upon.
3. Wage costs: companies prefer investing in locations with lower wage costs.
4. Infrastructure: the more advanced the infrastructure in a location, the more interesting to the investing company.
5. Human Capital: locations where human capital is more readily available are more likely destination.
6. Locations with stronger institutions are considered more attractive than locations with weaker institutions.
7. Special economic zones receive more attention.
8. Locations that already host companies of a specific industry are more attractive to investors active in that specific industry
9. The more firms in a location, the more attractive the location.
10. The more foreign firms already in a location, the more attractive the location. This is especially so if the foreign firms are of the same country of the investor.
11. Global cities are more attractive.
12. But the higher the costs related to big-city congestion the less attractive the location becomes.

Factors associated with the foreign company making the investment:

13. The more experience a company has with FDI the more likely it will select locations that it rules unattractive under the previous factors.

Factors related to the interplay of the destination location and the firm making the decision

14. The more experience in a foreign location, the more likely the investor will invest in that location.
15. The greater the distance the more likely it is that the investor will invest in the location.

Surprisingly, studies do not agree that lower wages and lower taxes correlate with more FDI. Only 50% of all studies found such a correlation. Surprisingly 50% of all studies show that the correlation either does not exist, or that the factors are negatively correlated (higher wages, higher taxes result in more FDI).

And in the majority of studies, distance is actually found to significantly correlate with a desire to invest in a location: the further away the higher the chance of FDI.

When a European company invests in the US, picking a location on the West-Coast may be counter intuitive at first, but doing so does not break a general trend. Furthermore, there are clearly many more factors than proximity, tax regime and wage levels when choosing a foreign subsidiary location and making a location decision.

[1] Bo Bernhard Nielsen, Christian Geisler Asmussen and Cecilie Dohlmann Weatherall (2016).
The location choice of foreign direct investments: Empirical evidence and methodological challenges. Journal of World Business, Volume 52, Issue 1, January 2017, Pages 62-82